By Peter Kroeger

Plan corporate development not just business development

Management teams tend to look at their businesses in the context of their markets and their direct competition. By and large, business plans are just that, aimed, perhaps not unreasonably, at the business development aspects of achieving a market position and financial targets. With the focus on organic and internal issues, it's not uncommon for the truly strategic aims of the business to receive short shrift. Factors that are external to the company or its direct markets or, indeed, apparently remote business aims, are rarely given more than passing attention. Yet, though cursorily dealt with, these issues are at the heart of the corporate development process: why are we in business, what are our goals, and how do we achieve them?

Consider the end game

For many small- and medium-sized independent businesses, the end game is scarcely considered. By end game we usually mean a trade sale, an IPO, or market dominance through continued organic growth and acquisition. But the essential corporate development goal is maximising enterprise value. The executive team assumes that if it achieves the market position and financial targets, then any corporate development activities acquisition, sale, IPO will follow automatically, or need only be addressed at that point.

But that is a fallacy. To be successful, corporate development activities need careful consideration, a wide vision, and require four essential elements. Corporate development strategies should be well founded, properly planned, well executed and properly integrated after the event. All are important, but get one wrong and the rest won't work. That is why ensuring that corporate development activity is well founded is so important.

Harmonise Business development and corporate development goals

The Catalyst Group can add a lot of value in this early planning stage. We bring to the business plan a corporate development perspective, so that the organic business development and the external corporate development strategies are in harmony. Oversimplifying enormously, business development looks at maximising the value of the firm in the eyes of its customers; corporate development looks at maximising the value of the firm in the eyes of its peers and investors . This absolutely doesn't mean that you ignore the customers to please the investors happy customers are a pre-requisite to happy investors, but you ignore investors at your peril.

Corporate development

It is critical to establish at an early stage what will make the company attract a high valuation. You should then monitor progress towards achieving that goal. Make sure the company's profile is raised and made known to potential buyers, capital providers and advisers. Evaluate performance to ensure that business and corporate development plans remain in synch.

Partner on the way up Corporate development activity can take many forms. One such form is developing strategic partnerships or alliances, sometimes with partners who may turn into buyers or acquisition targets later on. Atrium Group Ltd, the leading UK provider of video-based business intranet solutions, has appointed Catalyst to identify and secure strategic partnerships as part of its aggressive plans for growth.

You may need a catalyst

Sometimes, a company is either in trouble or not making sufficient headway and what is needed is a catalyst to help make things happen. This catalyst will produce new ideas, or develop ideas in a different way, or use its market knowledge to help the company break out of the doldrums.

Catalyst is expert in planning corporate development activity. We research venture capital providers, complementary acquirable companies, or potential buyers, and put a tailored proposition to them. In this positioning stage, Catalyst will ensure that the company has a realistic view of its own value and the valuation methodologies likely to be used by the targets. We advise on preparing for due diligence; how to brief and motivate the management team for the tasks ahead; and how to develop a winning proposition to take to the targets.

Divest to sharpen focus

Both customers and investors usually perceive focus on a clear core business as a good thing. Catalyst was charged by Intelligent Environments plc, the UK AIM listed financial applications company to divest its US based Screensurfer web-to-host software tools business. The initial phase of the project was to prepare positioning collateral and research the market to establish its competitive position, to see if the product was saleable and to identify strategic partners or acquirers. Catalyst identified potential acquirers, and entered into negotiations with two of them. We successfully concluded transactions with both by exploiting the opportunity to sign a source code licensing deal with Mentis International Corp while selling the business to the other, Ives Development, Inc.

Cross-border reach

A buyer in another country will often pay a premium over a local acquirer. Catalyst's cross border reach means it does not matter whether the targets and the client are in the same continent. With principals "on the ground" in Düsseldorf, Paris, London, New York and Austin TX, Catalyst covers the major IT markets in UK, USA, Benelux, France and Germany. We use our experience of cross-border transactions to help you make sense of the different languages, legal systems, accounting conventions, management styles, social regulations and national cultures. None of this is easy, but Catalyst has the track record of successfully executing both trade sales and acquisitions across all the above borders. The key is proper qualification of the financial, technical, cultural and managerial capability of the targets with which the clients enter into final negotiations.

Technological fluency generates empathy

All Catalyst principals are experienced in M&A in the IT and Telecoms sectors. Most have also been senior managers, owners, or board members of software and services companies, ranging from successful start-ups to large publicly listed companies. This ensures a thorough grasp of technology, including embedded software, software tools and languages, intelligent hardware, professional services, networks and infrastructure, application and bespoke software. In turn, this means that Catalyst principals can make a rapid assessment of any company's technology, market position, business and revenue models, and its competitive position.

As a result, Catalyst can quickly position a client company to best advantage, then research appropriate targets, and establish likely cultural and management fit before the client needs to divert his time. And this follows through into the negotiation, where both sides should be starting with mutual empathy. SWL Retail Systems Ltd, a leading supplier of innovative solutions for the retail industry, retained Catalyst to locate a purchaser able to maximise the potential of its operational efficiency technology. After evaluating all the major retail software organisations worldwide, Catalyst advised SWL through all the stages of its acquisition by Torex PLC, the London listed retail and healthcare solutions company. This involved an extensive earnout, which was acceptable to both parties.

Deal failures

It is estimated that around a half of potential transactions fail between heads of agreement and final closing because they are poorly founded, not properly planned or qualification of the financial, technical and managerial capability of the target was incomplete. Most of this should come out in the due diligence process, but it is a real waste of money, time and effort to get that far and then to fail. Good advisers will ensure that these potential failures do not get to the table in the first place.

Deals also fail to close because of inadequate communication, the adoption of an entrenched position by one side, a lack of focus on the post deal integration aspects, or unrealistic price expectations. A good M&A adviser will project manage the deal right through to completion. And the companies should always employ first class commercial lawyers and accountants. Inexperienced advisers can cause serious delay, by, for example, focusing on minor issues which have very little bearing on the overall transaction, and which can jeopardise the deal. A good commercial lawyer can better advise his client on the risks involved, and the potential costs of losing the deal.

And then there are lots of reasons why a deal fails to deliver the intended benefits after closing, but that is worthy of a book in its own right

Position early for success

The key proposition is that, if a company is well positioned, then planning and executing a fund raising, acquisition or trade sale will occur as natural steps in the implementation of its overall strategy. Preparation fosters positive action, rather than reaction. Timing is important, and sometimes opportunities are presented when least expected. But if a company's corporate strategy is well founded and planned, opportunism becomes possible.

M & A magazine, Vol 3 issue 11, April 2002